On Remand, ABB Wins Fund Change Case

In the long-running Tussey v. ABB lawsuit, a court found ABB breached its fiduciary duties, but a procedural error by plaintiffs handed ABB the win.

On remand, a district court weighing whether fiduciaries to a 401(k) plan abused their discretion when making an investment lineup change found they did, but since plaintiffs in the case failed to prove damages using the appropriate calculation, judgement was entered in favor of the fiduciaries.

The decision was made in the long-running case Tussey v. ABB in the 8th Circuit. The 8th U.S. Circuit Court of Appeals ruled that the district court’s opinion concerning the ABB PRISM plan’s switch from the Vanguard Wellington fund to the Fidelity Freedom target-date funds shows clear signs of hindsight influence regarding the market for target-date funds at the time of the redesign and the investment options’ subsequent performance. The court added that it could not be certain that the district court would have come to the same conclusion had it used the correct standard of deference to the fiduciaries in deciding whether the change was appropriate in relation to plan and investment policy statement (IPS) terms. The appellate court vacated the district court’s judgment and damages award and remanded for further consideration using the abuse of discretion standard set forth in Firestone Tire & Rubber Co. v. Bruch

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The U.S. District Court for the Western District of Missouri noted several procedural irregularities in the decision to switch funds, including:

  • the strong performance of the Wellington Fund during the time period specifically identified in the IPS;
  • ABB’s inconsistent explanations for removing the Wellington Fund and mapping its assets to the Freedom Funds;
  • the fact that ABB took a substantial part of the PRISM plan’s assets and put them into an investment that was so new that ABB needed to make an exception to the IPS; and
  • Fidelity’s explicit offer to give ABB a better deal if the Wellington assets were mapped into the Freedom Funds.

 

Given these irregularities, “the Court is confident that ABB was conflicted when it chose to take the Wellington Fund assets and put them into the Fidelity Freedom Funds,” the district court's opinion says. “The Court believes that the ABB Defendants knew that removing the Wellington Fund and mapping its assets to the Freedom Funds would result in persistent increased revenues to Fidelity, which ultimately would benefit ABB.” 

According to the court opinion, as a result of the fund switch, the PRISM plan sustained a loss because the Wellington Fund consistently outperformed the Freedom Funds after the mapping occurred. 

However, the district court said the plaintiffs in the case failed to satisfy their burden of proof on the issue of damages. The 8th Circuit noted that the district court previously awarded damages in the amount participants who had invested in the Wellington fund would have had if ABB had not switched funds and the participants had remained in the Wellington fund for the entire period at issue. The appellate court determined that, in light of the IPS requirement to add a managed allocation fund, the damages would more accurately be measure by comparing the difference of the Freedom Funds and the minimum return of the subset of managed funds the ABB fiduciaries could have chosen. 

Prior to making a decision, the district court had given both sides of the case an opportunity to make a new argument for damages, but they did not. The plaintiffs contended the 8th Circuit was wrong. They argued that the proper measure of damages would be the prudent alternative that provides the largest damages unless the breaching fiduciary sustains its burden of proof to establish a lower award is justified. However, the court noted they did not present what that figure would be.

Financial Literacy Among CEOs and CFOs on LinkedIn

A paper studies just how financially literate LinkedIn users are, with the so-called Big Three literacy questions as their starting point.

Numerous papers and researchers contend that Americans have low financial literacy.

Low financial literacy is associated with low levels of participation in the kinds of planning and savings decisions that are needed to build a sound financial future. Researchers at the National Bureau of Economic Research (NBER) studied these issues using an unusual set of respondents: largely tech-savvy, white-collar professionals who are users of LinkedIn, the professional networking site.

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In “Optimism, Financial Literacy and Participation,” they used the work of economists Annamaria Lusardi and Olivia Mitchell, who in 2006 designed a financial literacy quiz with three simple questions to evaluate the respondent’s knowledge of: compound interest, inflation and risk diversification. These concepts are fundamental in making informed financial decisions and are now widely used in financial literacy quizzes and papers. NBER’s researchers call the three questions “the big 3” in their paper and added two questions on: mortgage payments and the relationship between interest rates and bond pricing.

Researchers attempted to home in on retirement awareness rather than previous retirement savings, by asking respondents if they had tried to figure out how much they need for retirement. This framing avoids obvious correlation problems with age and income. Only about 3% of the sample was non-responsive, while about 85% of high-literacy respondents and around 45% of low-literacy respondents reported that they had tried to determine this amount.

Getting one additional question correct on the actual score raises the probability of answering yes to the retirement question by about 8%. Around 40% of low-literacy respondents have done this calculation; close to 85% of high-scoring respondents have done the calculation.

NEXT: What boosts the likelihood that a respondent has given some thought to retirement?

To gauge the economic significance of this effect, consider only those respondents with an actual score of 3 on the literacy test: only about 40% of those who thought they scored 2 or below had done retirement calculations, whereas 63% of those who thought they scored 4 or higher had done this calculation. In general, introducing beliefs alongside actual literacy cuts the effect of financial literacy in half and weakens the statistical significance of actual financial literacy. It appears that much of the connection between literacy and retirement planning operates through the channel of perceived literacy.

Close to 40% percent of respondents in their sample answered all five questions correctly, almost twice the average found for average U.S. citizens. But given that the sample consisted of tech-savvy, white-collar professionals, a large fraction of whom make more than twice the U.S. national average income, the paper’s authors contend it is reasonable to ask whether the financial literacy rates they measured should not be a great deal higher.

In fact, through that lens, their results reinforce the findings of previous studies: that mistaken beliefs about financial literacy may be as problematic as financial illiteracy itself.

More than a third of those who identified themselves as chief financial officers, chief executives or chief operating officers did not answer all five questions correctly.

NEXT: Perceived vs. actual financial literacy.

Like previous work, NBER’s researchers found that high-literacy respondents are likelier to exhibit productive financial behaviors: save for a rainy day, plan for retirement and pay attention to fees when choosing credit cards. However, this is mostly driven by perceived, rather than actual, financial literacy. When controlling for self-perceptions, actual literacy has low power to predict financial engagement.  

It is not that mistaken beliefs cause engagement, the researchers say, but in fact the opposite: that engagement causes mistaken beliefs. By this logic, small amounts of variation in the initial level of overconfidence or optimism could cause individuals to engage in financial decisions, and their engagement creates a type of learning by doing that in turn both imparts literacy to those who are engaged and magnifies their self-perceptions.

These results shed light on why efforts to improve financial engagement by increasing financial literacy have faced challenges. Education and advice are two channels often proposed for increasing  participation, and the results suggest that both must confront difficulties.

Because beliefs are often more important predictors of engagement than actual literacy, educational treatments that may threaten perceived literacy even as they improve actual literacy may be counterproductive in terms of their impact on increasing engagement.

Data for the paper was solicited on two days: January 20 and July 18, 2014, and a method was used to allow the researchers to isolate and distinguish optimism and self-confidence: responses that included “I don’t know” or which were unanswered were omitted. The final sample consisted of 5,814 responses.

Information on accessing “Optimism, Financial Literacy and Participation,” by Anders Anderson, Forest Baker, David T. Robinson, is on the website of the National Bureau of Economic Research.

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